In her first report of the year, National Taxpayer Advocate Nina Olson cited the new Form 1099 reporting requirements among her objectives for focus during the fiscal year ahead.
(The second report, due at the end of December every year, identifies at least 20 of the most serious problems encountered by taxpayers, discusses the ten tax issues most frequently litigated in the courts, and makes administrative and legislative recommendations to resolve taxpayer problems).
The Form 1099 reporting requirements, included as a payfor in the Patient Protection and Affordable Care Act, will require the tracking of payments for goods as well as services, and for payments to corporations as well as individuals.
In particular, businesses will have to issue Forms 1099 for goods purchased after 2011, regardless of the corporate form of the vendor, Olson stated. The Office of the Taxpayer Advocate is concerned that the new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate as compared with any resulting improvement in tax compliance.
This will add an untold number of 1099s to the mix, and its going to be a recordkeeping burden for the purchaser, said Benson Goldstein, senior technical manager at the American Institute of CPAs. What if they have multiple locations, and the purchaser is buying from many different vendors? Theres a lot to be worked out, but it will be a very burdensome task not only for the business community but also for the IRS itself.
The provision would apply to businesses of all sizes, charities and other tax-exempt organizations, and government entities, Olson noted. These would include 26 million non-farm sole proprietorships, 4 million S corporations, 2 million C corporations, 3 million partnerships, 2 million farming businesses, 1 million charities and other tax-exempt organizations, and probably more than 100,000 federal, state and local government entities, according to the report.
Olson listed a number of problems that might ensue, including the potential of identity theft if taxpayer identification numbers become public through routine printing on receipts. And, she noted, an information report is merely a return that itself may be erroneous. If so, it may generate a CP 2000 notice of underreported income.
At this point, the taxpayer may have to prove a negative, she said. Consequently, the IRS would have to develop a process for verifying and using information reports to establish an accurate amount of gross proceeds.
Moreover, the provision could negatively impact small businesses that lack the capacity to track customer purchases, she observed. Many large vendors already have computer systems that can track purchases by customer. They are likely to advertise that they will track each customers total purchases and send them a report at the end of the year that business customers can use to comply with the Form 1099 filing requirement. Small businesses seeking to minimize [the] recordkeeping burden thus will have an incentive to use large vendors that can produce these reports for them.
Olson intends to examine the impact of the new reporting requirements more closely during the coming year, assessing both the anticipated improvements in tax compliance and the burdens that the requirements are likely to impose on millions of small businesses. Depending on what our examination reveals, we may propose administrative or legislative recommendations to modify the provision, she stated.
Shes saying exactly what she should say, which is that it looks like this might be overwhelming, so lets wait and see, said Marty Davidoff, of Dayton, N.J.-based E. Martin Davidoff & Associates, and former president of the American Association of Attorney-CPAs. In my experience its hard enough to comply with current Form 1099 rules. With this projected expansion, it might be impossible.
IRS Commissioner Douglas Shulman acknowledged the additional burden the provision will impose on the business community. In remarks to the American Payroll Association and the American Accounts Payable Association in May, he said that the IRS would be spending the next several months soliciting input from businesses of all types and sizes before proposing regulations to implement the law.
As one example of how the IRS is analyzing the provision, he said, We plan to use our administrative authority to exempt from this new requirement business transactions conducted using payment cards such as credit and debit cards. These transactions will already be covered by reporting requirements on payment card processors, so there is no need for businesses to report them as well. So, whenever a business uses a credit or debit card, there will be no new burden under the new law.
Thats fine as far as it goes, Davidoff agreed. But its getting harder for small businesses to use credit cards because banks have been lowering their limits, he said. Small businesses can no longer put everything on a credit card.
IRS Notice 2010-51, issued last week, requests comments on the new provision, Goldstein noted. The AICPA is considering requesting repeal of the provision, he said. But even if we do urge repeal, well still offer comments on ways to reduce the burden, assuming no repeal makes it through Congress.
